Thursday, November 01, 2007

Improvement in Indian public finance

In the late 1990s, the #1 area of concern in India was the fiscal crisis. As an example, here is a gloomy piece that I wrote in 2001. A remarkable amount of progress has been made on that front. Tax policy is more rational; tax administration has improved; the FRBM Act has tied down the government; the Twelfth Finance Commission has triggered good improvements at the state governments also. In Economic Times today, Mythili Bhusnurmath talks about developments at the state governments.

In my reckoning, the fiscal consolidation is roughly half done. We aren't out of the woods yet, but a good down payment is visible. As Mythili points out, the focus has now shifted to monetary policy, where a comparable transformation of law and institutions has not begun.

1 comment:

1. Ajay, the passage of the FRBM was indeed a landmark achievement in bipartisan legislation. While the centre has been sticking to the targets under FRBM certain reservations remain.

Thanks to the business cycle and structural improvements in tax administration, the growth in tax collections has been unprecedented. A look at the tax/GDP numbers will attest to that. So instead of sticking to the letter of the FRBM targets the government could actually have done better. It is disappointing that a government run by an economist has allowed expenditure to bloat under cover of rapid revenue growth. Fiscal tightening would also have helped when we are grappling with overheating fears. The time for all this is past, I think. With the pay commission award and elections looming, things could start going downhill from next year onwards.

Another reason to take a dim view about the fisc is the issue of off-Budget oil, food and fertiliser bonds, in effect shoving subsidies under the carpet. Reckoning these bonds would add about 0.5 to 1% to the fiscal deficit/GDP ratio.

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